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Judge approves DOJ settlement in e-book case

SAN FRANCISCO (AP) — A federal judge has approved the U.S. Justice Department’s settlement with a trio of electronic book publishers accused of conspiring in a price-fixing scheme orchestrated by the late Steve Jobs.

Among other things, the agreement requires the publishers — Hachette, HarperCollins and Simon & Schuster — to abandon the pricing system that they had conceived with Apple before it released its iPad tablet in 2010. The change is supposed to come within the next week.

The ruling released Thursday cast aside the strident objections of Apple, other book publishers, book sellers and authors who argued the settlement will empower Internet retailing giant Amazon.com Inc. to destroy the “literary ecosystem” with rampant discounting that most competitors can’t afford to match.

Those worries were repeatedly raised in court filings about the settlement. More than 90 percent of the 868 public comments about the settlement opposed the agreement.

Apple Inc. and two of the objecting publishers, Macmillan and the Penguin Group, also had argued it would be unfair to approve the settlement before they have a chance to fight the government’s price-fixing allegations in a trial scheduled to begin next June.

But U.S. District Judge Denise Cote in New York decided the settlement “appears reasonably calculated to restore retail price competition to the market.”

In its objections, Apple had raised the specter of appealing if Cote approved the settlement. Apple had no immediate comment Thursday on Cote’s decision.

In a statement, the Justice Department said it is “pleased the court found the proposed settlement to be in the public interest and that consumers will start to benefit from the restored competition in this important industry.”

Cote’s ruling comes nearly five months after the Justice Department filed an antitrust lawsuit alleging Apple worked with the largest digital book publishers to rig a system designed to counteract Amazon.com’s pricing practices. The approach, known as “the agency model,” calls for book publishers, rather than retailers, to establish the prices of each title.

Under the agency model, merchants make their money through a commission. In Apple’s case, that translated into the standard 30 percent cut it collects on most products sold through its iTunes stores.

The publishers’ switch to the agency model came just before Jobs unveiled the iPad in January 2010. Before he died 11 months ago, Jobs confided to his biographer, Walter Isaacson, that he had convinced the major publishers that the agency model would be the best solution for all the key players in the rapidly growing e-book market.

“We told the publishers, ‘We’ll go to the agency model, where you set the price, and we get our 30 percent,’” Jobs told Isaacson. “And, yes, the customer pays a little more, but that’s what you want anyway.”

After the iPad hit the market in April 2010, publishers imposed the agency model on other retailers. They also adopted a “most-favored nation” clause designed to ensure other e-book sellers couldn’t undercut the prices in Apple’s iBookstore. In doing so, the publishers achieved their goal of undermining the pricing power of Amazon.com, which had been pricing many best-selling books as low as $9.99 to make its e-reader, the Kindle, more enticing to consumers.

Under the agency model, publishers typically set e-book prices in the range of $11.99 to $14.99. The Justice Department alleged that the price fixing cost consumers about $100 million in the two years leading up to its antitrust lawsuit.

The settlement also requires the Hachette, HarperCollins and Simon & Schuster to phase out agency model contracts with other retailers and bans them of imposing similar restrictions on prices for two years.

Apple contends the introduction of the iPad and iBookstore benefited consumers by spurring more competition and innovation.

Amazon’s share of the e-book market has fallen from about 90 percent to 60 percent since the introduction of the iPad and the pricing system that it helped usher in, according to court papers.

But Cote concluded the introduction of more e-readers to compete against the Kindle was the main factor in Amazon.com’s reduced market power. She also noted the proposed settlement hadn’t discouraged Microsoft from recently investing $300 million in Barnes & Noble or prevented Google from unveiling a tablet computer called the Nexus 7 to compete against Amazon’s Kindle Fire.

Book retailers contend any short-term benefits from Amazon’s discounting practice will be outweighed by the long-term damage caused by less competition as more brick-and-mortar stores close.

“To say the least, we are colossally disappointed that the judge failed to understand how consumers will be negatively impacted by a decision that does not take into account the realities of the book business in 2012,” said Oren Teicher, chief executive of the American Booksellers Association, which had opposed the settlement.

In a 45-page ruling that included an Emily Dickinson ode to the value of books, Cote said antitrust law isn’t designed to protect businesses from potential damages when a form of anticompetitive behavior is eliminated from the market.

“Although the birth of a new industry is always unsettling, there is a limited ability to foresee how the market will evolve,” Cote wrote. “What is clear, however, is the need for industry players to play by the antitrust rules when confronted with new market forces.”